Monday, 20 February 2017

Juan Carlos Benito Sánchez, PhD Fellow at the University of Louvain
(Belgium).Twitter: @jcbensan

In the past years, the Court of
Justice of the European Union has delivered a number of judgments striking down
substantive and procedural provisions of Spanish mortgage law, or judicial
interpretations thereof, on the grounds that they were contrary to EU law in
the field of consumer protection. In particular, the Court of Justice has based
its decisions on Council
Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts,
declaring in most of the cases that Spanish mortgage law unduly restricted the
right of consumers to have unfair clauses in their mortgage loan agreements
reviewed and nullified by domestic courts.

This post focuses on the last two
rulings delivered by the Court of Justice in this regard: its judgment in Gutiérrez
Naranjo (Joined Cases C-154/15, C-307/15 and C-308/15, EU:C:2016:980)
and in Banco
Primus (C-421/14, EU:C:2017:60), respectively delivered in December
2016 and January 2017. The first case concerns so-called ‘floor clauses’, which
establish a minimum threshold for the variable rate of interest determined in
mortgage loan agreements. The second case concerns ‘accelerated repayment’
clauses, which allow for the creditor to claim repayment in full of the outstanding
debt in case of arrears during a relatively short period of time, often as
little as three months. Both judgments raise a number of significant issues
with notable implications for EU consumer law and, ultimately, for the
fundamental right to housing of individuals and families.

The judgment in Gutiérrez Naranjo:
setting temporal limitations on the retroactive effect of unfair floor clauses

This first case concerns, in
essence, the temporal limitation that the case law of the Spanish Supreme Court
placed on the retroactive effect of unfair floor clauses included in mortgage
loan agreements. In its (in)famous ruling of 9 May 2013, the Supreme Court
declared that those floor clauses lacking transparency due to insufficient
information for mortgagors were to be considered unfair and, therefore, void.
In practical terms, since the variable rate of interest determined in these
agreements was usually tied to the Euribor—which plummeted owing to the
financial crisis—, many consumers saw the interest in their mortgage loans
plateau at the minimum threshold instead of falling to the much lower market
rate that would apply had floor clauses not been included in the loan. Because
the relevance of these clauses within the agreement was in most instances not
offset by adequate information and transparency for consumers, allowing them to
assess the extent of risk sharing, the Supreme Court affirmed that
non-transparent floor clauses—in practice, the vast majority of them—should be
deemed unfair and, consequently, void.

In the same ruling, however, the
Supreme Court tempered this declaration by determining that the retroactive
effect of the nullity of non-transparent floor clauses was to be limited in
time. In particular, and referring to the principle of legal certainty, it
considered that such nullity should not extend to situations obtaining prior to
the date of delivery of its judgment (9 May 2013). In the Supreme Court’s view,
full retroactivity would otherwise lead to ‘a severe disruption with
consequences for the economic public order’. This interpretation effectively
closed the avenue for consumers to claim the recovery of amounts overpaid on
the basis of non-transparent floor clauses if those payments had been made
prior to 9 May 2013.

The various questions referred to
the Court of Justice for a preliminary ruling in Gutiérrez Naranjo thus seek to determine whether EU law in the
field of consumer protection—specifically, Directive 93/13/EEC—precludes this
temporal limitation. The Court, building on its previous judgments, ruled that
a finding of unfairness regarding a contractual clause ‘must allow the
restoration of the legal and factual situation that the consumer would have
been in if that unfair term had not existed, by inter alia, creating a right to
restitution of advantages wrongly obtained, to the consumer’s detriment, by the
seller or supplier on the basis of that unfair term’ (§ 66). It considered that
a temporal limitation of the legal effects stemming from a declaration of
nullity is ‘tantamount to depriving, in general, any consumer having concluded,
before [9 May 2013], a mortgage loan contract containing such a clause of the
right to obtain repayment in full of the amounts overpaid by the consumer to
the bank’ (§ 72).

This conclusion does not come
unexpected considering the Court of Justice’s settled case law on Directive
93/13/EEC. Yet the judgment in Gutiérrez
Naranjo goes a step further: the Court of Justice found that ‘it is for the
Court alone, in the light of the fundamental requirement of a general and
uniform application of EU law, to decide upon the temporal limitations to be
placed on the interpretation it lays down in respect of [a rule of EU law]’ (§
70). In other words, the Court of Justice clarified that domestic courts cannot
restrict in time the effects of a rule of EU law of their own accord. The
general and categorical terms in which this statement is framed suggest
wide-ranging implications extending far beyond the realm of consumer
protection.

The judgment was widely reported
by Spanish media and was welcomed as a significant triumph of civil society
organisations defending the right to housing in Spain, which had made floor
clauses one of their more visible claims. The Spanish government rushed to
create a new extrajudicial mechanism to settle consumers’ claims for recovery of
amounts overpaid on the basis of non-transparent floor clauses, which has been
widely criticised in that it creates uncertainty for consumers and does not
impose sanctions for non-compliant mortgage lenders. Very recently, on 15
February 2017, the Spanish Supreme Court delivered its first judgment amending
its previous case law to this effect and confirming the full retroactivity of
unfair floor clauses in a mortgage loan agreement.

This second case concerns, in
essence, the limitations placed by Spanish mortgage law and in the case law of
the Spanish Supreme Court on the possibility for courts to declare the nullity
of unfair accelerated repayment clauses in mortgage loan agreements.
Accelerated repayment clauses, as explained above, allow for the creditor to
claim repayment in full of the outstanding debt (principal and interest) in
cases of non-payment of a very reduced number of instalments by the debtor. In
practical terms, this entails that if a mortgagor falls into arrears for,
usually, three months—out of their thirty-, forty-, or fifty-year loan term—,
the lending institution may call in the full amount of the loan. Following the
impossibility for the debtor to make such a large payment, the lender will
normally bring mortgage enforcement proceedings, sometimes under the special
distraint procedure foreseen in Spanish mortgage law, which will end in turn in
foreclosure and eviction.

Accelerated repayment clauses
have been routinely included by mortgage lenders in loan agreements for years,
and their execution, especially in the aftermath of the financial and housing
crisis in Spain, can be identified as the one of the main causes of thousands
of foreclosures across the country. Not only were these clauses frequent in
mortgage lending, but they were explicitly authorised by the Spanish Civil
Procedure Act, which mandates a minimum of three months in arrears before full
repayment of the debt can be claimed. Before a statutory modification in 2013,
lenders could even claim full repayment after one month of arrears. Following
the case law of the Spanish Supreme Court, however, accelerated repayment
clauses deemed unfair by lower courts because of the significant imbalance in
the parties’ rights and obligations to the detriment of the consumer could not
be declared void if they had not been effectively applied in the particular
case. Since lending institutions could rely on the Civil Procedure Act to claim
accelerated repayment instead of executing the—almost always unfair—accelerated
repayment contractual clause, courts were in fact prevented from declaring the
nullity of the latter and from suspending mortgage enforcement proceedings on
these grounds.

In Banco Primus, the referring court posed, amongst others, the
question whether domestic law and the judicial interpretation thereof could
prevent courts from declaring the nullity of unfair accelerated repayment
clauses in the event that they had not been effectively applied in the
particular case. The Court of Justice first recalled its previous case law
regarding unfair terms, and set out in detail the parameters which domestic
courts shall take into account in order to declare the unfairness of an
accelerated repayment clause on the basis of Directive 93/13/EEC. These
include, inter alia, the nature of the goods or services covered by the
contract and the means provided for in national law to enable the consumer to
remedy the effects of the loan being called in (§ 67). It then struck down the
interpretation of the Spanish Supreme Court, noting that ‘the prerogatives of
the national court ruling on whether a term is unfair, […], cannot be
contingent on whether that term was actually applied or not’ (§ 73). When the
national court determines the unfairness of a contractual term, ‘the fact that
that term has not been executed cannot, in itself, prevent the national court
drawing the appropriate conclusions from the ‘unfair’ nature of that term’ (§
73).

The practical consequences of
this judgment in the Spanish context are blunt: thousands of foreclosures and
evictions carried out on the basis on unfair accelerated repayment clauses
whose nullity domestic courts were prevented from declaring should have been,
in fact, void. Not only does this question the level of consumer protection
afforded to mortgagors by the Spanish authorities; but it also reveals, in the
author’s view, how Spanish mortgage law has successively been modified to
favour the interests of lending institutions to the detriment of mortgagors in
vulnerable situations.

A right to housing perspective

The two cases examined in this
entry are certainly illuminating, yet they are not the first ones revealing the
shortcomings of Spanish mortgage law in terms of consumer protection and in
terms of the right to housing. At the European Union level, other judgments of
the Court of Justice addressing this issue will sound familiar to some readers
(Aziz,
Sánchez
Morcillo and Abril García, Finanmadrid
EFC). At the international level, the UN Committee on Economic, Social
and Cultural Rights recently delivered its first decision under the Optional
Protocol to the ICESCR examining the judicial protection afforded to the right
to housing of individuals and families in the framework of mortgage enforcement
proceedings (I.D.G. v. Spain).

It should be borne in mind that
the right to adequate housing is enshrined, amongst others, in Article 7 of the
Charter
of Fundamental Rights of the European Union, which contains the right to
respect for private and family life. Framing mortgage law issues exclusively in
terms of consumer protection does not always capture the severity of the
situations that foreclosures and evictions may create: it is not merely about
financial institutions imposing unfair terms onto consumers with the indulgence
of public authorities, but also about individuals and families being denied
adequate judicial protection of their right to housing. Incorporating this
dimension into case law could serve to better contextualise the imbalance
between mortgagors and mortgagees by taking into account human rights
considerations, and strengthen the protection for mortgagors in terms of their
legal security of tenure.